16.26 The steps involved in applying the PIM are summarised in diagram 16.3 below.

16.3 THE PIM PROCESS

16.27 The PIM is applied to volume estimates of GFCF at a detailed level (i.e. for a particular asset type for a particular industry in a particular institutional sector). Volume estimates of net and productive capital stock and consumption of fixed capital are compiled using vector multiplication. The product of two vectors results in a value for a particular period. The first vector represents the age-efficiency or age-price or COFC pattern from when the fixed asset is new to the end of its life. The second vector is always the GFCF series. Shifting the second vector (GFCF) one year at a time before multiplying with the first vector results in a time series of values of capital stock or consumption of fixed capital, depending on the vector used.

16.28 For instance, gross capital stock at the end of period t is the product of the survival function and GFCF vectors. The first element of the GFCF vector is the value for period t, the second element is the value is for period t-1, the third is for period t-2, and so on. The final element is the value for period t-m, where m is the maximum possible life of the asset. A survival function represents the probability that a fixed asset is still in service and is derived from the asset life distribution. When the asset is new, the survival probability is equal to 1, but as it ages the survival probability declines, until it reaches zero. At the end of its life the asset is assumed to have a zero scrap value (in practice, it is recognised that positive and negative scrap values can occur. However, no attempt has been made to quantify the net effect of these). The survival function can be constructed by subtracting, for each period, the probability of retirement in that period.

16.29 Productive capital stock is the product of the average age-efficiency function (AAE) and GFCF vectors. The AAE for a particular asset age is calculated as a weighted average of the efficiency functions for each possible length of life, using the probability of retirement as weights.

16.30 Net capital stock is the product of the age-price function and GFCF vectors. Age-price functions are calculated using the AAE and a real discount rate in the following way. The present discounted value of the future stream of capital services from when the asset is new until the end of its life gives the first value of an age-price function, the present discounted value of the future stream of capital services from when the asset is one year old until the end of its life gives the second value, and so on. Age-price functions are normalised and adjusted on the assumption that all of GFCF in a year occurs mid-year.

16.31 Consumption of fixed capital is the product of the depreciation rate function and GFCF vectors. The depreciation rate function is calculated as the decline in the age-price function between assets of consecutive ages.

16.32 Current price estimates at the most detailed level of estimation of gross capital stock, net capital stock and consumption of fixed capital are obtained by reflating the volume estimates. The price indexes used to reflate the volume estimates are the same as those initially employed to deflate GFCF, except that for capital stocks they are adjusted to an end year basis by averaging consecutive values of the price indexes. For reflated consumption of fixed capital, which is a flow concept, the price indexes are not adjusted to an end of year basis. The resulting elemental series at current prices are aggregated to the level published, while elemental volume measures are aggregated to form chain volume measures at the level published. Elemental estimates of capital stock satisfy the following identities:

GKSt

=

GKSt-1 + GFCFt - Rt

NKSt

=

NKSt-1 + GFCFt - CCt

GKS$t

=

(GKSt-1 + GFCFt - Rt) * (PIt + PIt+1) / 2

NKS$t

=

(NKSt-1 + GFCFt - CCt) * (PIt + PIt+1) / 2

where

GKSt

=

deflated gross capital stock in period t

NKSt

=

deflated net capital stock in period t

GKS$t

=

gross capital stock in current prices at end of period t

NKS$t

=

net capital stock in current prices at end of period t

GFCFt

=

deflated gross fixed capital formation in period t

Rt

=

deflated retirements in period t

CCt

=

deflated capital consumption in period t

PIt

=

price index in period t

$

denotes the current dollar equivalent of the respective deflated series.

16.33 Average age of the gross capital stock at the end of each year is another output of the PIM. Average age is the age at 30 June of past years' GFCF weighted by their proportions of the surviving gross capital stock. These calculations assume an average mid-year purchase.

Current price gross fixed capital formation (GFCF)

16.34 The GFCF data required as input into the PIM are consistent with those published in Cat. no. 5204.0. A detailed description of definitions, sources and methods used for these estimates is presented in Chapter 15. The discussion is briefly reiterated in this section, and extended to include industry and institutional sector details.

16.36 A number of problems with the generation of detailed capital formation estimates affect the reliability of estimates produced by the PIM. In particular, sector and industry estimates of private gross fixed capital formation on machinery and equipment should be interpreted cautiously because the data available to adjust estimates in accordance with Australian Accounting Standard 17 (Accounting for Leases) are not as detailed as ideally required. Also, the major data source used to dissect private gross fixed capital formation on other buildings and structures into institutional sectors and industries excludes transactions in second-hand assets.

16.37 The first years for which estimates of capital stock and consumption of fixed capital have been published are 1966-67 and 1948-49, respectively. 1948-49 is the first year for which most national accounts data have been compiled by the ABS. Although the national accounts are now compiled from 1959-60 since the advent of SNA93, in order to estimate capital stock and consumption of fixed capital from 1966-67 and 1959-60, respectively, estimates of GFCF are required for much earlier years. The length of the detailed GFCF series required varies depending on the particular mean asset life and asset life distribution which applies to that series.

16.38 Estimates of gross fixed capital formation for years prior to 1948-49 are generally less accurate than those since 1948-49. However, because of the retirement of older assets and the rapid growth of the Australian economy since World War II, the early data have relatively little impact on the present estimates.

16.39 Estimates for years prior to 1948-49 are prepared using various sources including Butlin (1), and ABS data from issues of Production Bulletins, Primary Industry Bulletins, Secondary Industry Bulletins, Finance Bulletins, Transport and Communication Bulletins, State Statistical Registers and Australian and State Year Books.(1) Butlin N. G., Australian Domestic Product, Investment and Foreign Borrowing, 1861 - 1938/39, Cambridge 1962.

16.40 The construction of historical estimates, by asset type, is discussed in detail in Chapter 22 of the previous edition of this publication (Cat. no. 5216.0).

16.41 Estimates of general government capital stock and consumption of fixed capital are calculated using the PIM by government purpose category. Estimates by purpose are then transformed into industries to obtain general government capital stock and consumption of fixed capital by industry. As the relationship between the government purpose classification and the ANZSIC is complex, this can only be done on an approximate basis.

Machinery and equipment

16.42 Data on gross fixed capital formation for machinery and equipment are broken down by kind of economic activity, at the ANZSIC Division level, and into six major classes of machinery and equipment, namely:

computers and peripherals;

electrical and electronic equipment;

industrial machinery and equipment;

road vehicles;

other transport equipment; and

other plant and equipment.

16.43 Gross fixed capital formation on each of the six classes of machinery and equipment is estimated for each industry (or purpose category in the case of general government) in each institutional sector. The estimation procedure has two stages. In the first stage various data sources are used to make initial estimates of the breakdown of equipment expenditure for each industry in each sector. Chief among the data sources are the Survey of Private New Capital Expenditure (SPNCE) during 1997 for the above six categories, a survey of private new capital expenditure by detailed category in respect of 1987-88, data for the six categories from the Economic Activity Survey (which covers the whole economy except the general government sector) for every year from 1998-99, a survey of general government capital formation for the six categories in respect of 1994-95, quarterly estimates of the supply of imported and domestically-produced capital goods, and from 1994-95 the annual supply and use tables. In the second stage the initial estimates are adjusted to ensure consistency with both annual GFCF totals and total supply of the six categories of machinery and equipment. The adjustment is done using the RAS procedure (a residual allocation system - see Chapter 12 for further details).

16.44 In the case of computers and peripherals it has been assumed that there is no expenditure on this class of equipment before 1960, and that expenditure on computers rose gradually after that time until the first data observation for imports in 1978-79.

Livestock

16.45 Estimates of the value of sheep and cattle that are used repeatedly or continuously to produce products such as milk and wool, or are used as breeding stock, are included in gross fixed capital formation. The scope of livestock and its data sources are discussed in more detail in Chapter 15. The main source of data on volumes is the ABS annual agricultural census, the results of which are published in Agriculture, Australia (Cat. no. 7113.0). Calculation of sheep and cattle numbers also relies on slaughtering and exports data from Livestock Products, Australia (Cat. no. 7215.0). Data on prices of animals are more difficult to obtain and a wide range of sources, including industry publications and direct sources are used.

16.46 Livestock capital formation is recorded in the Agriculture, forestry and fishing industry. The institutional split is based on information obtained from the Australian Taxation Office and counts of agricultural business units from the ABS Business Register. Based on these sources, the estimated allocation of GFCF for livestock is 90 per cent to households and 10 per cent to non-financial corporations.

Intangible fixed assets

Mineral exploration

16.47 Mineral exploration covers expenditure on exploration for petroleum, metallic minerals, construction materials, gemstones, and other non-metallic minerals, but not expenditure on successful bids for offshore petroleum leases. The scope of exploration activity in Australia is further discussed in Chapter 15. Data on mineral exploration expenditure are obtained from Mineral and Petroleum Exploration, Australia (Cat. no. 8412.0), while data for expenditure on successful bids for offshore petroleum leases are obtained from the Department of Industry, Science and Resources. The latter data are subtracted from the former. Data on exploration by commodity (other than for petroleum) for the period 1948-49 to 1965 are largely based on data compiled by the Bureau of Resource Sciences.

16.48 Mineral exploration is confined to the Mining industry. Sectoral information is obtained from Mineral and Petroleum Exploration, Australia (Cat. no. 8412.0). GFCF is primarily allocated to non-financial corporations, although a small amount of exploration activity is also attributed to the general government sector and unincorporated enterprises.

Computer software

16.49 Estimates for the three components of computer software gross fixed capital formation, namely software developed in-house, purchases of customised software, and purchased 'off the shelf' software, are described in more detail in Chapter 15.

16.50 For 1997-98 and subsequent years, data for capital formation in computer software by private and public corporations are available from the annual Economic Activity Survey (EAS), after adjusting for expenditure relating to the repair and maintenance of computer software and expenditure on contractors. Estimates of GFCF for the latest year are extrapolated using imports of computer software for 'off the shelf' software and by linear trend extrapolation for the remainder.

16.51 Capital formation in computer software by general government units are derived using Government Use of Information Technology, 1997-98 (Cat. no. 8119.0) as the benchmark and extrapolated using data sourced from the ABS's public finance statistics.

16.52 Gross fixed capital formation in computer software for each industry is estimated using the industry proportions in Business Use of Information Technology, 1993-94 (Cat. no. 8129.0), adjusted to include the agriculture, forestry and fishing industry, as this industry is not covered. It is assumed that software use by farm units is likely to be more consistent with use in those industries that are not intensive users of software.

Entertainment, literary or artistic originals

16.53 This item covers the production of originals of: films; television programs, both by television stations (own-account) and independent producers; music products, both by recording companies and music publishers; and books by publishers. Separate estimates are prepared for Film and independent television, Television (own-account), Music record companies, Music publishing, and Literary works. The scope of these items, along with their data sources, is described in more detail in Chapter 15.

16.54 Artistic originals are confined to the cultural and recreational services industry. For music originals, all GFCF is allocated to non-financial corporations. The sectoral split for film and television is based on assumptions about who holds the copyright and receives the flow of income which the relevant film or television show produces over subsequent periods. In the 1970s most feature films were funded through government agencies such as the Australian Film Commission, the NSW Film Corporation, the South Australian Film Corporation and the Victorian Film Corporation, with a small number fully financed by distributors. Hence a very high proportion of total receipts has been attributed to the government sector.

16.55 In the 1980s almost all features and independent TV drama were funded using private and largely 'non-industry' finance raised under 10BA tax incentive scheme, with 'top up' finance provided by government film agencies. Initially, the scheme allowed operators to claim a 150 per cent tax deduction for any money invested and to pay tax on only half of any income earned from the investment. However, the level of deductions and income exemptions has been progressively reduced. Accordingly, it has been assumed that over this period the government share of receipts fell during implementation of the scheme and rose as it was progressively scaled back, while the non-financial corporations share behaved conversely. Most returns accrued to non-financial corporations, but at some stages a significant number of individuals made direct investments. Hence a small amount has been attributed to the household sector.

16.56 For literary originals, all GFCF is attributed to the household sector.

Ownership transfer costs

16.57 For the stamp duties and other government charges components of ownership transfer costs, estimates are derived using direct data on stamp duties available from each State government. Estimates for the lawyers' and real estate agents' fees components are based on taxation statistics and the results from the periodic surveys published in Real Estate Agents Industry, Australia (Cat. No. 8663.0) and Legal Accounting Services, Australia (Cat. No.8678.0).

Price Indexes

16.58 The price indexes used in the PIM are essentially the same as those used in the preparation of chain volume estimates of gross fixed capital formation in the gross domestic product account (described in Chapter 15). However the latter, with the exception of intangible fixed estimates, are only compiled as chain volume estimates back to 1985-86. They are then linked to previously compiled constant price estimates at base years generally five years apart. In contrast, the volume estimates derived as a means of estimating the capital stock related statistics are compiled all in one piece. The same is true for the reflation to derive current price estimates and chain volume estimates. This process requires the compilation of continuous price indexes going much further back in time than those required for the gross domestic product account.

16.59 For all categories other than construction, the price indexes extend no further back than 1948-49, but for construction they extend much further back. For years prior to 1948-49, the following price indexes are used:

Dwellings and other buildings and structures other than roads - a general building price index derived from Haig (2) for the years 1938-39 to 1948-49. For the years 1866 to 1938-39, a price index derived from Butlin.(2) Haig B.D., Capital Stock in Australian Manufacturing, Department of Economics, Research School of Social Sciences, Australian National University, Canberra 1980.

Roads - a roads price index derived from Keating (3), and Bureau of Transport Economics data (1941-42 to 1947-48).(3) Keating M., The Growth and Composition of the Australian Workforce 1910-11 to 1960-61; thesis submitted to the Australian National University, Canberra, 1967.

16.60 As with the GFCF data, the poorer quality of early data should be considered in the light of its small contribution to more recent year capital stock levels. Furthermore, unlike GFCF, most price indexes tend to be reasonably highly correlated over time.

16.61 The underlying price indexes from which the GFCF price indexes are compiled relate to a number of different base periods because of the length of the time series required. For example, ABS price indexes with base years of 1953-54, 1959-60, 1966-67, 1974-75, 1979-80, 1984-85 and 1989-90 are used, as well as non-ABS price indexes prior to 1948-49 which have earlier base years. Therefore, it is necessary to splice the price indexes with different base periods on the basis of relationships in overlapping periods.

16.62 Although only one price index series results for each item, it is a hybrid of several series. When the current price values of machinery and equipment purchased in 1949-50 are calculated for example, price indexes for the early 1950s are used which reflect the composition of GFCF in 1953-54. In the mid to late 1950s, price indexes which reflect the composition of GFCF in 1959-60 are used, etc.

Machinery and equipment

16.63 Price deflators for machinery and equipment are compiled for the six equipment categories described above:

computers and peripherals;

electrical and electronic equipment;

industrial machinery and equipment;

road vehicles;

other transport equipment; and

other plant and equipment.

16.64 The six equipment deflators are used for all institutional sectors, industries and general government purpose classifications. They are constructed from a supply and use model which allows for the identification and treatment of imported components separate from the treatment of those components which are domestically produced. Price indexes from Import Price Index (Cat. no. 6414.0) are used to revalue the imported components, and price indexes from Price Indexes of Articles Produced by Manufacturing Industry (Cat. no. 6412.0) are used to revalue manufacturers' sales data. Current price and chain volume estimates of the supply of each of the six equipment categories are formed and used to derive implicit price deflators (IPDs) for the six equipment categories. The IPDs for four out of the six asset categories have been extended back to 1948-49 by linking on the total equipment deflator in 1984. The two asset types which have not been linked onto this deflator in 1984 are: computers, because the U.S. Bureau of Economic Analysis computer equipment price index is available back to the early 1960s; and motor vehicles, for which producer price indexes are available back to 1968 (and therefore the total equipment deflator has been linked onto this series in 1968).

Livestock

16.65 Acquisition and disposal prices are collected separately for beef cattle (breeding stock), dairy cattle, and wool producing sheep. The GFCF price is then calculated as the unit acquisitions price less the disposals price using the chained based approach at this level of detail. Annual acquisition prices are obtained from ABARE. Disposal prices are estimated using quarterly ABS livestock slaughterings information, as the ratio of the total value of slaughterings to the total number of slaughters, and then annualised.

Intangible fixed assets

Computer software

16.66 There is no Australian software price index currently available, although several countries have initiated development work to construct such indexes, and several experimental indexes over a limited time span have been published. Statistics Canada has developed an intuitive software price index in the Canadian SNA Input-Output Tables, which declines by 6% a year. This estimate is constructed by observing the trend of software prices over time for popular PC software. The ABS has chosen to use this index for the time being.

Entertainment, literary or artistic originals

16.67 Music - music originals are revalued using the wage cost index for Cultural and Recreational Services in Wage Cost Index (Cat. no. 6345.0).

16.68 Film and TV - from 1980, the CPI index for entertainment services is used. From 1976 to 1979, the CPI index for recreational goods is used. For 1974 and 1975 the CPI index for recreational goods and services is used. From 1970-71 to 1974, the aggregate CPI is used as there is no suitable component price index for this period. These component indexes are linked to form the film and TV price index.

16.69 Literary - the CPI index for books, newspapers and magazines is used back to 1977, and then the CPI for newspapers and magazines back to 1970-71. These two component indexes are linked to form the literary price index.

Mineral exploration

16.70 From 1969-70 the price index used to revalue both mineral and petroleum exploration expenditure is that used to revalue exploration expenditure in the derivation of chain volume estimates of the gross value added of services to mining - see Chapter 24. This price index is composed of price indexes of inputs to mineral and petroleum exploration. For the years between 1948-49 and 1969-70 the IPD for GDP is used. These series are linked to form the mineral exploration index.

Mean asset lives

16.71 The mean asset lives are the most important of the parameters used in the PIM. Together with asset life distributions (see paragraphs 16.95 to 16.103 below), and the age-efficiency functions, they determine when assets are retired from the gross capital stock, the net capital stock, and the rate of depreciation charged. Six main data sources are used to derive estimates of mean asset lives:

implicit tax lives;

weighted prescribed tax lives;

asset lives used by businesses to calculate depreciation for their own purposes;

survival rates for vehicles in the motor vehicle fleet derived from data on new vehicle registrations and the motor vehicle census;

technical information on the operating lives of various types of machinery from manufacturers' specifications; and

asset life estimates from other OECD countries.

Changes in asset lives over time

16.72 Asset lives are influenced by a large number of variables, which may either increase or decrease asset lives over time. These variables include changes in rates of use, technological advances and quality changes. In the case of motor vehicles there is strong evidence that mean lives have increased over the past fifty years, and these increases have been incorporated in the perpetual inventory method (PIM) for estimating the capital stock. It is possible that the lives of other classes of assets have also changed, but there is no conclusive evidence to demonstrate that this has occurred. While the lives of particular classes of assets may change over time, the average life span of all capital equipment also changes as a result of the changes in the composition of capital formation. This effect has been captured to some extent by breaking expenditure on machinery and equipment down into six major classes. Since the 1960s there has been a steady increase in the use of computers, which in 1997-98 comprised about 12 per cent of capital formation on machinery and equipment. Computers are a relatively short lived item of equipment, and the increase in their use has had the effect of reducing average equipment lives. The increased use of computers and the increased lives of motor vehicles have offsetting effects, with the net impact on equipment lives differing between industries according to the relative weights of computers and motor vehicles in their machinery and equipment expenditure. In industries where motor vehicles form a high proportion of machinery and equipment expenditure, such as agriculture, average lives have increased, while for industries such as finance and insurance, where computers form a relatively high proportion of capital formation, average equipment lives have fallen.

Machinery and equipment

16.73 Asset lives are estimated for the six classes of machinery and equipment. In calculating average asset lives, implicit tax lives (based on the inverse of the depreciation rates published in the 1997 Master Tax Guide) are used as a basic source of information. While implicit tax lives may change over time, they are regarded as being of insufficient accuracy to calculate changes in economic lives over time. They are, however, industry based and comprehensive in coverage. In principle they are based on industry information about the actual service lives of machinery and equipment. Nevertheless, information from other sources suggests that tax lives are, in general, shorter than economic lives, and additional sources have been used to estimate the actual economic lives of the various types of machinery and equipment.

16.74 The additional information sources are less comprehensive in coverage than the tax data, so selected items of machinery and equipment have been used to estimate ratios of tax lives to economic lives. The general approach has been to calculate a weighted average tax life for the various types of machinery and equipment employed in each industry, then supplementary sources, such as technical data and information collected from industry sources have been used to estimate the economic lives of assets employed in those industries. Where no new information on economic lives has been available the estimates developed by Walters and Dippelsman have been adopted (Australian Bureau of Statistics Occasional Paper No. 1985/3). A ratio of economic lives to average tax lives has then been calculated. This ratio has been applied to all machinery and equipment employed in the industry to determine an average economic life.

16.75 The ratio of economic lives to tax lives differs between industries. For example, much of the machinery and equipment used in agriculture is similar to machinery and equipment used in mining and construction, and particular items of machinery and equipment, such as tractors, generally have the same prescribed tax life regardless of the industry in which they are employed. However, work practices differ between industries, with machinery and equipment engaged in agriculture generally being used less intensively than similar equipment in the construction or mining industries. Agricultural equipment can therefore be expected to last longer than similar equipment engaged in construction or mining, and so the ratio of economic lives to tax lives is higher for agriculture than for construction or mining. In some cases the lives of particular classes of machinery and equipment differ between industries; this is notably so in the case of electrical equipment. In the electricity, gas and water industry division, electrical equipment is estimated to have an average life of twenty years, compared with an average life of 11.6 years for electrical equipment in other industries, allowance being made for the longer life of the heavy electrical equipment used in that industry.

16.76 Asset lives for machinery and equipment in 1996-97 are reported in table 16.4 below for each industry. Due to a lack of information as to whether asset lives have been lengthening or shortening, the asset lives of all categories other than road vehicles and computers are held constant.

16.77 In the case of road vehicles, which constitute over 30 per cent of gross fixed capital formation on machinery and equipment equipment, average lives have been estimated using data on new vehicle registrations and the age composition of the vehicle fleet. Data are published in New Motor Vehicle Registrations, Australia: Preliminary (Cat. no. 9301.0) and Motor Vehicle Census, Australia (Cat. no. 9309.0). For the census years, the number of vehicles of each vintage surviving in the stock has been related to the number of new registrations in the year of manufacture, to calculate the percentage of survivals from the respective vintages. The results show a general decline over time as the older vehicles drop out of the stock. The point at which 50 per cent of vehicles manufactured in a particular year remain in the stock gives the median life of vehicles manufactured in that year. For example, if 50 per cent of the vehicles manufactured in 1960 (or more precisely first registered in 1960) remain in the stock in 1972, then this implies that the median life of vehicles manufactured in 1960 is 12 years. This technique has been used to estimate vehicle lives at the census dates, and lives for the intervening years have been calculated by interpolation. It is not possible to precisely calculate mean lives, as a proportion of vehicles have lives exceeding the range covered by the data available. However, analysis of the age distribution suggests that the median is a close approximation to the mean.

16.78 Vehicle lives are estimated using the above approach from 1950. Over the period 1950 to 1979 motor vehicle lives increased from 13 years to 18.5 years. It is not possible to measure the median lives of vehicles manufactured until half of them have actually lived out their lifespan and so for recent years this method is unapplicable. For recent years a combination of data for the average age of the vehicle fleet and trends in the age profile of the fleet are used to project trends in vehicle lives. It is estimated that the median life of motor vehicles manufactured in 1997 is 20.5 years.

16.79 The average life of computer equipment is assumed to have gradually declined from eight years in 1960 to five years in 1997-98. This change is attributed to the decline in the proportion of mainframe computers relative to PCs and the longer lives of the former.

16.80 The estimated average lifespan of other buildings and structures (including alterations and additions) are given in table 16.5. These estimates are based on the findings of Walters and Dippelsmann, and a detailed dissection of the mean life of other buildings and structures into new buildings, construction (other than building), alterations and additions, and a weighted average were reported in table 22.1 in the previous edition of Australian National Accounts: Concepts, Sources and Methods. These estimates have been checked against data on the age of buildings demolished in the Sydney and Melbourne central business districts over a ten year period. The Sydney and Melbourne data broadly support the age estimates used by Walters and Dippelsman, giving an average age at demolition of 62 years. The short time span for which data are available and the relatively small number of buildings demolished over that period do not permit any significant conclusions to be drawn as to whether building lives have been increasing or decreasing over time. It can be argued, a priori, that as a result of economic and population growth the use of core infrastructure becomes more intensive (i.e. the flow of services from that infrastructure increases) and that, all things being equal, the life span of those facilities would be reduced. However, in the absence of clear empirical evidence to support that proposition, the asset lives used by Walters and Dippelsman have been retained.

Other buildings and structures - private corporations

16.81 Taxation lives are considered too short, and lacking in discrimination between different industries and types of buildings. Unpublished data used in compiling Building Activity, Australia (Cat. no. 8752.0) were obtained showing separately new work and alterations and additions for different types of buildings. Alterations and additions are assumed to have an average asset life about half that of new work, in that they can occur at most stages in the life of the primary building. Information on types of other construction for the private sector is obtained from Engineering Construction Activity, Australia (Cat. no. 8762.0). Estimates are finalised on a subjective basis, taking into account lives used in other OECD countries, accounting estimates, and estimated proportions of new buildings, alterations and additions and non-building construction.

Other buildings and structures - public corporations

16.82 For public corporations, separate investigations are undertaken for electricity, gas and water; transport and storage; communication; accommodation, cafes and restaurants, cultural and recreational services; and personal and other services. Mean lives for public corporations are also reported separately in table 16.5. Together, these industries account for around 90 per cent of public corporations GFCF. For other industries, the estimates of private sector asset lives are used.

Other buildings and structures - general government

16.83 Other buildings and structures consists mostly of offices, schools, hospitals and roads. The average life of total other buildings and structures is estimated to be 54 years, with new government buildings assumed to have the same average life as private commercial buildings of 65 years. As with private commercial buildings, the evidence as to whether the average lives of buildings are changing over time is inconclusive, and lives are assumed to remain constant over time. For non-dwelling construction on roads the mean asset lives used by Walters and Dippelsman, in their capital stock estimates published in 1985, have been retained.

Dwellings

16.84 The estimates used by Walters and Dippelsman in 1985 have been retained, as no more recent information is available. For each type of dwelling, it is assumed that there has been no change in mean asset life over time. However, the composition of dwellings by type of structure has been changing over time.

Ownership transfer costs

16.85 The treatment for ownership transfer costs in the PIM is unique: these costs are depreciated instantaneously. Effectively the GFCF is fully recorded as consumption of fixed capital in the same period. This treatment means that the effective life of ownership transfer costs is zero.

16.87 It is important to distinguish between the different types of software because they are known to have different asset lives, partly due to the different lives of mainframe and personal computers. The software 'mix' has also been changing over time, in favour of PC-based software.

16.88 In-house and customised software - information has been obtained from academic papers and Gartner research, although empirical evidence is quite weak. For years up to 1988-89, a mean life of 8 years (maximum 12 years) has been chosen (see table 16.6 below). From 1989-90, the greater incidence of outsourcing software development, combined with increased technological change, is believed to result in shorter lives, and so a mean life of 6 years (maximum 8 years) has been used.

16.89 Purchased (packaged) software - for years up to 1988-89, a mean life of 6 years has been chosen (see table 16.6 below). From 1989-90, average and maximum lives fall by two years to reflect the impact of greater technological change. Thus average lives fall from 6 years to 4 years in 1989-90.

Entertainment, literary or artistic originals

16.90 Music - general information about the life cycle of typical Australian music titles is obtained from the Australian Record Industry Association (ARIA). Indications point to an average life of two years and a maximum life of five years. However, detailed information is not obtained from ARIA's membership to verify the accuracy of these indications.

16.91 Film and TV - it is difficult to attribute an asset life to film as little is known about the percentage of films that continue to generate revenue for periods greater than one year, two years etc. However, information from the Australian Film Commission, and from Martin Dale's book The Movie Game - the film business in Britain, Europe and America, indicated that an average life of 3.3 years and a maximum life of 6 years would be appropriate (the number of films that earned much money after their sixth year is very small).

16.92 Literary - information is obtained from the Australian Publishers Association's (APA) booklet Introduction to Book Publishing, and from enquiries to large publishers. APA recognises that books have a very short life. An average life of 1.4 years and maximum life of about 5 years was proposed, and there were no objections to this estimate in discussions with experts from the APA and other large publishers. However, the increasing availability of new print technology such as 'print on demand' could redistribute the author's income, and therefore the life of book titles, over a longer period in the future.

Mineral exploration

16.93 Asset lives for mineral exploration are assumed to coincide with mine and oilfield lives. These are derived indirectly using economic demonstrated resources (EDR) from the balance sheets. First, average annual production for each commodity is divided into its EDR to derive the asset life for each commodity. Using exploration expenditure proportions for each commodity as weights, the average lives for the commodities are aggregated to an average mine life for all commodities. The average mine life used for mineral exploration is 34 years (see table 16.6).

16.94 Mine lives for some commodities, namely black coal, iron ore and uranium, have extremely long asset lives, and are excluded from the calculation to avoid distorting the average life. These items had a much greater proportion of total exploration expenditure in early years, but their inclusion would lead to an unjustifiably strong decline in the overall average life of mineral exploration over time.

(a) Prior to 1989-90, the mean life is 8 years.(b) Prior to 1989-90, the mean life is 6 years.

Asset life distributions

16.95 The PIM is applied at a relatively high level of aggregation, with each component of GFCF consisting of a large variety of individual assets, each with its own life span. Even within particular types of assets, variations in lives will occur because of differences in the rate of use, maintenance etc. Because of the lack of recent empirical evidence, asset life distribution curves developed by Winfrey (4) in 1938 are used. The Winfrey S3 is a bell-shaped symmetric curve, with approximately three quarters of assets retiring within 30 per cent of the mean asset life. It is empirically based, related to variations in lives of particular types of assets, and is consistent with the general presumption that the expected life for a particular asset will follow an approximately normal distribution.(4) Winfrey R., Statistical Analysis of Industrial Property Retirements, Iowa State College of Agricultural and Mechanic Arts, 1938.

16.96 Exceptions to the use of Winfrey S3 are made for alterations and additions and for some intangible fixed assets. In the case of alterations and additions, the flat symmetrical Winfrey S0 is used, reflecting the belief that lives for these assets are likely to be widely dispersed rather than being clustered about the mean.

16.97 In the case of intangible fixed assets, several approaches have been taken, as described below.

16.98 Computer software - consideration was given to the high level of technological change in computer software, due to factors such as the release of new generation operating systems and applications, and the availability of more powerful computer equipment and networking capability, the latter introducing some correlation between the lives of computer software and hardware. Accordingly, right skewed retirement distributions have been constructed separately for purchased and for in-house and customised software. For both categories, new retirement functions were introduced in 1989-90 to reflect some decline in softwares' mean life and maximum life.

16.99 Artistic originals - retirement distributions reflect the distribution of the number of years for which artistic originals yield an income or royalty. Information obtained from peak industry bodies implies that retirement distributions are heavily skewed to the left because the vast majority of artistic originals receive an income over a relatively short period (often one or two years). However, a small percentage receive an income over a much longer period, and represent the majority of income received.

16.100 Music - information about the proportion of music originals that still provide a return to the artist is obtained from ARIA. It suggests that 70 per cent of music originals provide a return in the first two years, with the remaining 30 per cent providing a return fairly evenly over the following three years.

16.101 Film and TV - information is obtained from Martin Dale's book The Movie Game - the film business in Britain, Europe and America, which examines the life cycle of a typical film. Dale's book describes how a film is sold across a series of different media, each with a different price and separate time window. His research suggests that the survival of a film depends on its level of financial success. According to his studies, for instance, a quarter of the revenue comes from films which last two years or less and do not make it past the cinema, 30 per cent of revenue comes from films that make it into world video, and the remaining 45 per cent of revenue is attributed to films making it onto television in the fourth, fifth and sixth year. It is mainly the characteristics of financially successful films that will be represented in the asset lives. The vast majority of films, which fail to return a profit, have little impact on the asset life. Weighting films according to their revenue stream avoids the problem of retiring films quickly in accordance with the 'average film', and therefore depreciating films too quickly.

16.102 Literary - information obtained from the Australian Publishers Association suggests that 75 per cent of literary originals are retired in the first year and 90 per cent in the first two years.